INNOBLOG

This article is part of a 10-part series highlighting what companies need to do to transform uncertainty into opportunity. The full list will be posted on HarvardBusiness.org and SilverLiningPlaybook.com. The Silver Lining launches June 1.

#2: Does your organization have a handle on the future potential of innovation projects and existing businesses?

Like it or not, most companies are going to have to trim their innovation investments. In many cases, this means shutting down some ideas in the development pipeline. In other cases, it might mean shutting down or selling off a product line or a business unit.

Companies shouldn't make these decisions haphazardly. A simple inventory detailing the potential of existing efforts and businesses can help companies make the right strategic decisions.

When making decisions about in-development ideas, look beyond short-term financial projections. Focus instead on upside potential, residual risk, and the cost of testing the most critical assumptions. The degree to which the consumer has an important, unsatisfied job-to-be-done should play a critical role in the process. For existing businesses, look at unexploited potential in existing markets and to-be-created potential in new markets.

Read the rest at Scott's Havard Management blog, Innovation Insights.

On June 1, the new book by Innosight's Scott Anthony, The Silver Lining: An Innovation Playbook for Uncertain Times, will be released. As Scott says in a post on his Harvard Management blog, Innovation Insights, "the book's central theme is that today's turbulent times make mastering innovation a competitive necessity. I hope that the book provides corporate innovators and entrepreneurs with practical guidance to seize the ample opportunities that still exist in today's markets."

To help leaders do just that, beginning today Scott is running a 10-part series on his blog, each part describing a piece of a checklist of actions for innovation leaders looking to realize those opportunities. In each post, Scott will describe why each item is important, provide an example of a company that has put the concept into action, and describe "Monday morning" actions to implement the item. We will continue to run excerpts from these on InnoBlog, but you may want to bookmark Innovation Insights now so you won't miss any of this series.

Here's an excerpt from the first checklist item:

In today's tough times, companies may feel like they have a choice: focus on innovation or survival. It is a false choice. Innovation has gone from a nicety to a corporate necessity. After all, remember what legendary trial lawyer Clarence Darrow — clearly channeling Charles Darwin — said: "It is not the strongest of the species that survives, nor the most intelligent, but rather the one most adaptable to change."

It's tough to get started unless there's a common understanding of the challenge. As such, the first item on the Seizing the Silver Lining Checklist is: Does your organization recognize today's transformation imperative?

In today's hyper-competitive world, competitive advantage that takes years to build disappears seemingly overnight. Constant change is the new normal. Companies can't win through operational excellence alone. They have to master the ability to fundamentally transform what they do and how they do it.

However, a lack of common understanding around the transformation imperative can doom well-intentioned efforts. One of the biggest innovation killers is the "sucking sound of the core." Common understanding of the need to change can help to ward off this sucking sound.

Read the rest at Scott's Harvard Management blog, Innovation Insights.

The most recent issue of Wired featured a great article dissecting the ascendancy of small, simple portable computers called netbooks. Everything about the story feels disruptive ... except for the fact that market incumbents seem to have caught the trend.

The netbook revolution started a couple years ago when MIT Media Lab visionary Nicholas Negroponte started the "One Laptop Per Child" project. The notion was to use open source software and off-the-shelf technologies to make laptops affordable enough for children in developing nations.

While the OLPC project itself hit some roadblocks, the concept of simple, cheap laptops surged. A Taiwanese company called Asustek, which had done outsourced design for many leading personal computer manufacturers, introduced a $300 computer called the "Eee" a couple of years ago.

The company designed the device to be "good enough" to perform simple tasks like email and surfing the Web, hence the name "netbook." It sacrificed speed and the ability to run more complicated software to hit the radically low price point.

Netbook usage has surged, particularly in Europe. Consumers have found the devices more than adequate for the tasks most people do on their computer — e-mail and basic word processing.

Willy Shih, a Harvard Business School Professor who teaches a section of Innosight co-founder Clayton Christensen's "Building a Sustainably Successful Enterprise," told Wired, "netbooks are a classic Christensenian disruptive innovation for the PC industry."

Yet ... there's one strange part to the story. Usually when a wave of disruption hits an industry, the market leaders get caught flat-footed. Either they wait too long to respond, or they bungle their response. But in this case, Dell, Hewlett-Packard, Acer, Lenovo, and other laptop leaders seem to have successfully "caught" the disruption. ...

Read the rest at Scott's Harvard Management blog, Innovation Insights.

The current issue of Fast Company was sure to get my attention. "The World's 50 Most Innovative Companies!" the cover blared. I start flipping through. The first eye roll came when the #1 ranking went to "Team Obama," which last time I checked was not a company. Then Google. Seemingly fair enough. Then Hulu, the online video joint venture between News Corp and NBC Universal. Huh?

I am a big fan of Hulu. Chapter 9 of The Silver Lining names it as one of 10 innovations that are well positioned to thrive in today's tough times. My colleague Renee Callahan has done an excellent analysis of Hulu's success to date. But the third most innovative company in the world?

My pet peeve with these kinds of compendiums is they often don't define what exactly an innovative company is. Often they will list companies that are doing cool things, or companies that have done a masterful job exploiting their core business. I couldn't even find a description of how Fast Company put its list together in the magazine.

I'm even more skeptical of surveys that ask executives to name innovative companies. Those surveys suffer from endless Halo Effects, and really shouldn't be trusted.

I empathize with editors trying to put these lists together, because it's awfully hard. After all, what does an innovative company look like?

In my mind, an innovative company does more than exploit a single idea. It develops the systematic ability to extend into new markets, and create entirely new business models. And importantly, it doesn't just invent new things; it makes money with its new efforts....

Read more at Scott's Innovation Insights blog.

Here's a seemingly career-killing sales tactic: tell your customers they waste a lot of money on the product that forms the core of your company's business. Good way to land on the next cost-cutting list? For Xerox, this approach has actually created a powerful growth strategy.

The core of the strategy is Xerox's innovative shift from selling products to selling solutions. Instead of pushing copiers, printers, and related parts and services, Xerox is increasingly helping customers manage their end-to-end printing processes.

Xerox (and other vendors like Hewlett-Packard) offers customers the long-term ability to keep costs under control by providing consulting services to help them better managing their existing equipment. An article in today's Wall Street Journal suggested that such efforts can reduce printing costs by up to 30 percent.

That's a strong sales proposition in today's tough economy. While Xerox might miss short-term printer and copier sales, it is building long-term, potentially lucrative relationships -- and a base to move into additional productivity-related services. ...

Read the rest at Scott's Innovation Insights blog.

Here are some thoughts about how three pieces of the $787 billion stimulus package could affect healthcare companies:

1. $17B for roll-out of Electronic Medical Records (EMR) over the next 5 years - EMR has the potential to vastly increase payor (e.g. Aetna, UnitedHealth) power over physicians, mandating the use of standardized protocols and evidence-based medicine. This is more bad news for the traditional high-touch sales and marketing model of device and pharmaceutical companies, and means that the days of me-too competition in a therapeutic class will be short in number.

Suppliers to the industry will need to focus and differentiate, partly through offering total solutions vs. pill or device widgets. Many of these solutions may require partnerships with firms whose identity as long-term friend or foe remains uncertain (e.g. Microsoft, Medco). Pharmacy Benefit Managers will try to leverage EMR and their own databases to be high-value repositories of information. Vendors of decision algorithm software will grow rapidly in number.

The stimulus included privacy and opt-in provisions around health records; the impact of those rules is unclear, but likely it creates benefit for those who own the patient relationship and who therefore can get the opt-in most easily. ...

Read the rest at Scott Anthony's Harvard Management blog.

Last week Harvard Business Publishing hosted an audio conference on my forthcoming book, The Silver Lining. The 90-minute discussion included some great dialogue with moderator Angelia Herrin and the audience. There were a handful of questions that I didn't get a chance to answer during the course of the discussion that I thought would be generally interesting to readers here.

Q: Why are "defined processes" considered "innovation killers"?

This question refers to a slide that made the case that many of the perceived advantages of big companies are actually quiet innovation killers. As such, a silver linings of today's tough ties is it scarcity will force companies to do what they should have been doing already.

The basic problem is that sharply defined processes can stymie innovation. ...

Read the rest at Scott's Harvard Management blog.

Last week's post described my negative experiences with companies that appeared to be cutting down on customer service. I empathize with these companies. They face the tough challenge of figuring out what to cut as demand dwindles.

And after decades of continuous improvement programs, most companies don't have much fat to trim.

It's the "more with less" problem. It's easy to say that tough times demand doing more with less, but hard to figure out exactly what that means. Far too often doing more with less involves slashing the biggest line item on a budget, or spreading cuts across the board (so-called "peanut butter" cuts).

The third chapter of my forthcoming book The Silver Lining provides more direct guidance on this point. The chapter's critical message is that you can't do more with less until you figure out exactly what "more" means. This means any cost-cutting effort must start with a deep understanding of the customer, the job they are trying to get done, and the metrics by which they measure performance.

This knowledge can help spot opportunities to spend less and deliver more value. ..

Read more at Scott's Harvard Management blog, Innovation Insights.

Just about every company faces tough choices about how to improve operations in an increasingly tough environment. Companies need to be careful that short-term cuts don't lead to long-term pain.

I've clearly stated my perspective that the worst thing companies can do in the Great disruption is to stop investing in innovation. Companies might think that innovation and survival are discrete choices. They are not. Companies that stop innovating are sowing the seeds of their own destruction.

Customer service is another investment companies should cut cautiously. Two companies to which I have been a loyal customer for years severely tested that loyalty within the last week. ...

Read the rest at Scott's Harvard Management blog, Innovation Insights.

In December, Innosight and Forbes administered a survey to get a field-based perspective on transformation. We're still crunching through the results, but on Inauguration Day here in the United States, there was one emerging finding that seemed worth highlighting.

The survey had an open-ended question, "What organization do you think is best positioned to transform itself over the next 3-5 years?" The almost 500 survey respondents flagged close to 75 different organizations. The most named organization? Google. The second-most named organization? The U.S. Government.

I think the survey responses are another indication of the general hope around the Obama administration, hope that of course will dissipate if it isn't translated into action.

Organizational transformation is a tough task. Just about everyone has lived through a failed effort to transform a team, unit, or broader organization. Done well, however, a transformation can set an organization up for decades of success. ...

Read the rest on Scott's Harvard Management blog.

Today's Wall Street Journal has a fascinating front-page story of how Microsoft had ample opportunity to build a strong search advertising business, and blew it, leaving the market largely to Google.

The article describes how Microsoft started working on paid search, where companies bid to have small advertisements tied to search keywords, in the late 1990s. The company ran a paid search trial on the MSN site in 2000. MSN managers placed restrictions on the trial, such as having $15 as a minimum price, to minimize cannibalization. The trial brought in less than $1 million in revenue, and was shut down in 2000.

Microsoft re-focused on the market in 2002 after Google's AdWords program began to take off. In 2003, it passed on buying Overture, a company whose technology facilitated paid search. Microsoft launched its organically created system in 2006. By that time Google had established a dominant market lead.

It is a classic story of the traps to watch out for if you are an incumbent seeking to pioneer new markets. ...

Read the rest at Scott's Harvard Management blog, Innovation Insights.

Is it possible that the electric vehicle story isn't actually about the vehicles themselves, but about battery suppliers and business model innovators?

For generations, manufacturers like Toyota and General Motors earned most of the profits in the automotive industry. While manufacturers are struggling today, suppliers and distributors are in just as bad, if not worse, shape.

A recent Wall Street Journal article described how assembling electric vehicles is relatively simple. "Electric cars use only basic motors and gearboxes, and have relatively few parts," the article notes. "Aside from perfecting the battery itself, they're far easier and cheaper to build -- and that makes for a level playing field."

What impact would a simpler-to-produce product with a key performance-defining component have?

Read the rest at Scott's Harvard Management blog.

Two emerging technologies entering the living room. One still largely a pipe dream, and likely to be expensive upon introduction. The other seemingly just around the corner, and likely to be reasonably priced. Which one is most likely to gain rapid adoption?

While the disruptive models generally favor cheap-and-quick technologies, my money is on the expensive pipe dream (three-dimensional television) over the almost-here-and-affordable offering (televisions with embedded Internet capabilities)--unless companies can break from past patterns and embrace simplicity.

The simplest way to assess a technology's potential is to ask whether it helps the consumer do what they are already trying to get done....

Read the rest on Scott's Harvard Management blog, Innovation Insights.

While the global economy began slowing down in late 2007, forces transforming the face of business trace back more than a decade. Over that time period, technological improvements have made it ever easier to start and scale a business. Convergence went from being a cliché to a reality. Companies from countries like China, India, and Brazil burst onto the world stage. The global slowdown coupled with the credit crunch in late 2008 accelerated these forces.

If sagging employment and dwindling economic prospects led historians to term the 1930s the Great Depression, perhaps it is appropriate to tab today's hyper-competitive market where competitive advantage dissipates in a heartbeat the "Great Disruption."

In 2009, managers will realize that they are no longer dealing with a crisis; they are dealing with a condition. In the Great Disruption, companies simply can't anticipate that today's competitive advantage to last for more than a few years. Former Intel Chairman Andy Grove anticipated this more than a decade ago when he wrote, "Only the paranoid survive."

While companies might want to return to the corporate equivalent of comfort food--cost-cutting and a focus on the core business--the Great Disruption won't allow it.

Some companies have been developing their innovation abilities for years. They are in good position to seize the opportunities that always present themselves in tough economic climates. ...

Read the rest at Scott's Harvard Management blog, Innovation Insights.

In The Innovator's Dilemma, Clayton Christensen showed how entrants have overwhelming advantages over established companies in battles of disruptive innovation. Subsequently, Christensen and Innosight have argued that incumbents can tilt the odds in their favor by organizing and acting in the right ways.

It's a nice conceptual argument. Does the data support it?

Earlier this year, Innosight assembled a database of close to 300 disruptive developments over the past 100 years (other analyses based on the database can be found at Forbes.com and our own Strategy & Innovation electronic publication). The database includes published examples and developments we've picked up through our field work. Most of the examples are success stories, some are struggles, and some are works in progress.

The database isn't comprehensive, but it's a good starting point for this kind of analysis. The data suggests that it is increasingly common for an established company to launch disruptive innovations. ...

Read the rest at Scott's Harvard Management blog, Innovation Insights.

Kevin Bolen co-authored this post.

It seems that everyone wants to know what the automakers will do differently in the increasingly unlikely event that they receive a massive Congressional bailout. Leaders suggest they'd like automakers to "be more innovative" and "reinvent their business model." But what exactly does that mean? And how would government officials monitor progress against these goals to see if the bailout is being well spent?

First, let's look at what it would take to "be more innovative." Our research and field work suggests watching whether automakers:

1. Place the customer at the heart of the innovation process: Firms that succeed in innovation are obsessed with learning more about the customer and, more specifically, the jobs they need to get done. Clayton Christensen likes to describe how millions of people use their car as an office, but no auto manufacturer has designed a car with desk space, power options for laptops and phones, Wi-Fi connectivity, and other features that would help get this job done. Looking for important, unsatisfied jobs-to-be-done could help auto manufacturers identify attractive growth segments and avoid commoditization. One sign that auto manufacturers have appropriately shifted their attention: an increase in the ratio of market research spending to advertising spending.

 

2. Have senior leaders actively engage in innovation: Leaders in many of the firms we work with and admire participate daily in innovation efforts. And this is not passive involvement. They join focus groups, observe behaviors, review project plans, help set prioritization parameters, evaluate funding requests, and develop and oversee unique organizational models to incubate the best concepts. Innovation is not simply a budget item for these leaders; it is second only to talent development on their personal to-do lists.

 

3. Create a diversified portfolio of ideas: No one can accurately predict what market demands will be five to 10 years from now. No one knows what the energy situation will look like. No one can predict the economic climate. No one knows precisely which early-stage ideas will take off and which will stagnate. Pinning a firm's future on a single breakthrough is unrealistic. A broad, diversified innovation portfolio can help companies withstand shocks and respond to market shifts. The freedom to fail in one area because of emerging opportunities in another is the hallmark of an effective innovation program.

Second, what would it really mean for the U.S. automakers to "reinvent their business model"? Our colleagues Mark Johnson and Clayton Christensen have an article with this very title in the latest Harvard Business Review.

One of the fundamental problems the article highlights is that many companies are held captive by their capabilities....

Read the rest at Scott's Harvard management blog.

Who is your competition? The question seems so simple, but a company that defines its competitive set too narrowly can miss disruptive attackers and high-potential growth opportunities.

Take, for example, a recent article in the Wall Street Journal describing Apple's surprising entry into the video game market. A few short months ago, Apple launched the "App Store," where iPhone and Touch users can download a wide range of applications. Some applications are free, others cost a few dollars.

A recent visit to the App Store showed that seven of the top 10 applications are games. More than 2,000 games are available in the App Store. Developers are taking advantage of unique features in Apple's products--like an accelerometer that tracks motion--to develop engaging, entertaining games.

One video game manufacturer--Nintendo--is watching this development closely. One of its executives told the Journal, "Whether you chose to play on your DS [Nintendo's handheld console] or listen to music on your iPod, we're already in the same competitive space for time."

In the very next paragraph, a Sony executive displayed a different perspective, noting that Apple isn't a threat because "the consumer is using the mobile gaming on the iPhone and iPod Touch as a time waster."

Anyone who has tracked this industry over the past couple of years would find these answers predictable.

Read the rest on Scott's Harvard Management blog, Innovation Insights.

About a week ago, my wife let out a contented sigh while browsing the Internet. She was visiting Amazon.com, and saw an announcement that the company was experimenting with hassle-free packaging. Amazon's move illustrates one of the important advantages that entrants have over industry titans.

Anyone with children (we have a three year old and a one year old) knows that gift-giving times go through a predictable cycle. It starts with ebullience as children open their presents. Then frustration sets in as you have to deal with seemingly dozens of small, twisted wires that take forever to untangle. You grumble about evil, profit-minded corporations, and your children just wonder if they'll ever get to play with their new toys.

Amazon hopes to do away with this hassle. It has worked with manufacturers over the past few years to develop packaging for 19 popular products that is easier to open and more environmentally friendly. If experiments with more hassle-free packaging succeed, Amazon plans to extend the program to other products.

It's a winner all around: less hassle for parents, cheaper shipping for Amazon, and less environmental degradation.

Don't expect this movement to spread to toys sold in Wal-Mart or other traditional retailers any time soon. It's not that retailers hate their consumers. They don't. They do hate shoplifters. Difficult-to-open packages are a critical shoplifting deterrent.

Amazon's direct-to-consumer model is shoplifting resistant, so it can design a solution that maximizes its profits and consumer satisfaction....

Read the rest at Scott's Harvard Management blog, Innovation Insights.

Enough talk of recessions, silver linings, and stock swoons. Let's have some fun.

Over the weekend, I was watching an episode of Seinfeld featuring a chance encounter at a video store ("The Smelly Car," from 1993). The 15-year-old episode felt instantly dated, because with Netflix, Video on Demand, Hulu.com, iTunes, and YouTube, who actually goes to video stores anymore?

It got me thinking. What are small, everyday things today that will feel dated 15 years from now? Here are a few that hit me:

Getting lost. Planning a car trip to an unknown destination used to be a somewhat complicated activity (particularly for those of us who live in Boston!). You'd dig out the maps, talk to people who had made the voyage, and document your planned attack. If you had an appointment at a specific time you'd leave early to make sure you made it in time. Your greatest fear: getting lost somewhere unfamiliar.

For many people today, driving to an unknown destination involves getting precise directions from a Web search or punching an address into a Global Positioning System device, and going. As GPS technology becomes increasingly ubiquitous, we'll smirk at old television shows where key plot points revolve around the compound impact of making a wrong turn. Of course, we'll all gradually lose our sense of direction, but that's another point.

Parallel parking stress. Back when I was learning to drive, I spent an inordinate amount of time getting tips from friends and family about parallel parking. Today, many of us will pass a prime parking spot because of the fear of parallel parking.

The increasing sophistication of automobiles obviates much of this fear. ...

Read the rest on Scott's Harvard Management blog, Innovation Insights.

Andrew Laing wrote about Dash yesterday here. Scott Anthony offers another take from his Innovation Insights blog:

When a startup company sharply shifts its strategy, does that mean the company is in trouble? That's a natural question after Dash Navigation, a startup in the GPS space with a novel business model, announced a sharp shift this week. These shifts can actually be good news--if the shifter has the time and ability to iterate towards a successful business model.

Dash introduced its first product--the Dash Express--earlier this year. The device mimicked many of the features of devices sold by companies like Garmin and TomTom, with an interesting service model. Customers pay a modest monthly fee to have access to real-time traffic information. Even more interestingly, the real-time traffic information comes from aggregating data from Dash devices. Further, Dash created open protocols to allow developers to create "mash-ups," such as a way to find the cheapest gas near a driver at a particular time.

Dash's approach certainly had a disruptive feel to it (as highlighted in Innosight's Strategy & Innovation publication).

Clearly Dash's business model would have its greatest chances of success if Dash were able to get its device in the hands of tens of thousands of consumers in a particular market. Unfortunately, Dash has struggled.

User reviews suggest that Dash's device didn't do a good enough job with the basics. Of 161 reviewers on Amazon.com, 65 gave the product three stars or lower. A typical review contains language like, "It frequently thinks I'm exiting the freeway, even though I'm not. When driving down the street it will all of a sudden decide to reroute me around a block of houses, as if it believes I turned, when in fact I'm still going straight."

It's tough enough to be a late entrant into a field populated with big companies. If your device doesn't cross the "good enough" bar on critical dimensions, you are in real trouble. ...

Read more at Scott's Harvard Management blog, Innovation Insights.

No matter what phrase you use to describe it — nature abhors a vacuum, necessity is the mother of invention, every cloud has a silver lining — common wisdom suggests that every crisis presents opportunities.

The current economic turbulence is no exception. I'm no expert economist, but I think it's pretty safe to say we're not done with markets vacillating from dizzying highs to plummeting falls, and that there's plenty more pain to feel in the U.S. and World economies.

Does that mean that would-be innovators should go into deep hibernation? Instead of thinking of the next great thing, should they find the safest operating role they can find until the current storm passes? Certainly not.

Perhaps the good times are in fact dead. And certainly someone thinking of forming the umpteenth "Web 2.0-widget-to-grab-audience-and-find-advertisers" ought to pause to think whether they really have some kind of defined competitive advantage that can translate into a sustainable business.

But real customers continue to face real problems. And as always, innovators who figure out different ways to solve those problems — and make money doing so — will have opportunities to create new growth businesses. In fact, the creative destruction unleashed by a crisis always opens up opportunities for innovation.

Read more at Scott's Harvard Management blog.

Want a good way to get a group of executives to pause before making a decision about an innovation project? Ask them which of the following innovations they would prefer:

Innovation A: This innovation came out of the gates like a bullet, racking up first-year sales of more than $200 million. A clear value proposition, clever positioning, and a strong distribution network led to market success.

Innovation B: This innovation had first-year revenues of a mere $220,000. The innovation had proprietary technology, but the customer and the business model were very unclear.

It's obvious, right? Innovation A is the winning proposition.

Let's reveal more information. Innovation A was Vanilla Coke. It was a line extension that largely cannibalized sales of Coke's other products. Three years after launch, fizzling demand led Coke to pull the product from the market.

Innovation B was Google. In Google's early days, it had a technology and not much else. After a couple of iterations, though, it came up with its advertising-based business model, setting the stage for one of the greatest economic success stories of current times.

Far too many companies make decisions about which projects to fund based on a single set of metrics, with an overwhelming focus — particularly in today's challenging economic climate — on near-term sales. ...

Read the rest at Scott's Harvard Management blog, Innovation Insights.

When a company talks about trading off pure performance in the name of lower prices, disruptive alarm bells start ringing. After all, companies like Dell Computer, Southwest Airlines, Wal-Mart, Charles Schwab, and Nucor have prospered by following this kind of low-cost disruptive strategy.

A startup company called LifeSize Communications hopes to be next on the list. As described in a recent BusinessWeek article, the company offers reasonably high-quality videoconferencing over the Internet at prices that are sharply below emerging market leaders Cisco Systems and Hewlett-Packard. LifeSize's solutions range from $5,000 to $40,000, compared to as much as $300,000 for Cisco's solutions.

It's reasonable to predict that we'll see an increasing number of similar low-cost strategies as economic woes continue and start-up companies seek to find the opportunity in economic turmoil. Therefore, it's natural to ask: How can you tell if a low-cost disruptor is going to succeed?

Our analysis of companies that have successfully and unsuccessfully followed low-cost disruptive strategies suggest that for LifeSize to succeed, it must be able to answer yes to three key questions: ...

Read the rest at Scott's Harvard Management blog, Innovation Insights.

People typically associate innovation with the introduction of a sexy new product or service. While this kind of innovation gets the headlines, innovative ideas applied to everyday problems can have just as much business impact.

Consider a recent Wall Street Journal article describing how top fashion companies like Gucci and Burberry are working hard to better manage their supply chain. One critical problem: replacing dud collections before retailers grow antsy. Burberry has spent more than $100 million to improve its ability to ensure that the right products get to the right stores at the right time.

These challenges of course require a fair amount of blocking and tackling, but there's also ample room for fresh, innovative thinking. And think of the top- and bottom-line impact of finding better, cheaper, and faster ways to get products into stores more quickly.

Innovation should matter to you if your job doesn't involve strategy or product development. ...

Read the rest on Scott's Harvard Management blog, Innovation Insights.

Companies just starting innovation efforts often begin by getting a group of people together and telling them "It's innovation time!" I've never seen efforts like this succeed in meaningful ways.

Instead, we suggest that companies begin innovation efforts by creating an innovation strategy that details clear targets and tactics.

Clear targets help internal innovators know what they're shooting for. A reasonable starting place is to imagine what success looks like five years in the future. Are you seeking to double your business? Hold it steady? Something else? Setting a target that is several years in the future can help to de-politicize a potentially charged discussion.

Then think about the sources of growth. How much can you reasonably expect your core business to contribute? In some industries your five-year contribution might be below today's contribution, and that's okay.

Next, look at what's already in your development pipeline. What can you reasonably expect that pipeline to contribute in the future? One tip here: make sure to risk-adjust your pipeline. If you assume all of your projects will succeed, you are being wildly optimistic....

Read the rest at Scott's Harvard Management blog, Innovation Insights.

Innovation inspiration can come from outside the business world. Today's source of wisdom: The Simpsons. Today's lesson: Be wary of peddlers offering skin-deep fixes for deeply rooted innovation issues.

Companies looking to boost their abilities to innovate routinely turn to companies that seem to have solved the innovation equation for inspiration. They observe elements of the company's environment (free food! no doors! online jam sessions!). They seek to mimic those environmental elements to get similar results.

The problem is that a "culture of innovation" involves much more than these superficial elements. In fact, my colleague Steve Wunker is fond of saying that culture is a lagging, not a leading indicator. Changing culture requires changing activities. Changing superficial stuff without changing the real stuff doesn't accomplish much.

If you have trouble remembering this, think back to the episode of The Simpsons when, after a random bear sighting, the town of Springfield invests heavily to guard against future "attacks." The town thinks the heavy investment pays off, because bear sightings drop by 100 percent.

Read the rest at Scott's Harvard Management blog, Innovation Insights.

“Why bother?” That was the question posed by a manager after hearing me describe how very hard it is for even the best run incumbents to successfully create new growth businesses. “If historically the success rate has been less than 20 percent,” the manager continued, “shouldn’t I just leave this game to start-ups?”

It is a provocative question. After all, markets often punish companies that diversify into non-related industries, because individual investors can get the benefits of diversification by investing in different industries themselves. Are companies similarly wasting their time — and their investors’ money — when they try to invest in innovation?

Maybe established corporations should solely focus on exploiting what already exists, leaving the creation of what doesn’t to start-ups. Of course, not investing in innovation ultimately will consign a company to failure, but hey, that’s what creative destruction is all about.

There is no doubt that the innovation struggles of incumbents lead to significant waste. Companies spend billions of dollars developing fatally flawed products and services. They give advertising agencies billions more to convince people to want things that they really don’t.

An inefficient incumbent innovation market has spurred the ascendancy of the venture capital industry. Venture capitalists earn substantial fees attempting to fix this market inefficiency by providing capital to startups. Similarly, growth-seeking incumbents pay investment bankers handsome fees to advise them on acquisitions to plug the growth holes created by their innovation struggles.

However, we strongly reject the view that incumbents should eject from the innovation game. Incumbents have tremendous assets at their disposal. They have whip-smart developers with ample resources to invent cool, new things. They have economies of scale that can help them operate efficiently. They have partnerships that can help accelerate the development and deployment of new growth initiatives.

Read the rest on Scott's Harvard Business blog, Innovation Insights.

A brewing discussion about Starbucks’ new coffee flavor highlights a challenge facing innovation-seeking incumbents: Which customers should we listen to?

As part of a broader effort to reinvigorate the company, Starbucks recently rolled out a mild-tasting coffee called “Pike Place Roast.” It has quietly moved away from offering bolder-tasting coffees, such as its Sumatra brand, particularly in the afternoon.

Starbucks brought Pike Place Roast to market in response to complaints from Consumer Reports and others that its coffee tasted bitter or burnt. A small group commercialized the brew in six months—an astonishingly short period of time in the food industry.

While Consumer Reports and the mass-market has cheered, a vocal group of core Starbucks loyalists panned the coffee—one reviewer on a Starbucks Web site designed to solicit customer feedback called it a “fundamental, grievous error”—as watered-down and away from what makes Starbucks distinct.

Incumbents seeking to create new growth often face a version of this dilemma. Should we listen to our best, most loyal customers, or should we turn our ears towards customers we’re not serving well, or even to customers we are not serving at all?

Read the rest on Scott's Harvard Business blog, Innovation Insights.

As mentioned, this morning I did the "Q" part of a 75-minute Q&A session with P&G CEO A.G. Lafley. The discussion was wide-ranging, covering everything from the need to re-think marketing and advertising to the benefits of a liberal arts education. At the end of the session, I told the audience that my six takeaways were:

1. In an age of disruption, growth is getting increasingly difficult.
2. Companies need to take the long view. Lafley said he finds it hard to watch CNBC for more than 7 minutes because the focus is so short-term.
3. The customer needs to be the center of the innovation equation. When Lafley took over as CEO in 2000, he said he saw too many managers on their cellphones, or buried in spreadsheets, in essence "showing customers their behind."
4. Experimentation is key. Lafley talked about the value of giving customers even crude prototypes to test an idea. He also described how different parts of his organization approach innovation differently, and that's a good thing.
5. Complex organizations need to simplify to successfully innovate. Lafley said he seeks Sesame Street simplicity.
6. The CEO has to be the "Chief External Officer" to manage external pressure and the "Chief Innovation Officer" to push the innovation agenda forward.

Read the rest at Scott's Harvard Management blog, Innovation Insights.

If any of you are going to be at the Front End of Innovation conference this week, stop by the Innosight booth on Tuesday. I'll be there, and would love to meet any of my readers!

Also, on Wednesday morning I'll be doing the "Q" part of a Q&A with Procter & Gamble CEO A.G. Lafley about "The Art and Science of Game-Changing Innovation." The discussion will focus on some of the key messages in his recently released book. I'd love to have one of the questions come from you, so suggest a question, and I'll try to pick one or two of the best ones (and of course let you know what A.G. has to say).

Feel free to add a question in the comments here or on my Harvard Management blog (link below).

Thanks!

Cross-posted from Scott's Harvard Management blog, Innovation Insights

The Fortune 500 issue had a fascinating story about Amazon.com. “It’s easy to believe that Jeff Bezos is one of the great innovators,” the story noted. “But that’s not exactly the case. His rise into Fortune 500-dom actually has little to do with innovation and more to do with iteration.”

It pains me when I see innovation and iteration painted as opposed in some way. In fact, the only way to successfully innovate is to be prepared to iterate like crazy.

There is a misbegotten belief that new growth businesses arise fully formed out of an innovator’s head. That couldn’t be further from the truth. Carefully look at the history of just about any innovation success and you’ll find a course correction, if not an outright failure.

There are many classic examples of innovation through iteration. Google was just another search engine until it iterated its way to AdWords and AdSense. About three months before the public launch of the iPhone, Apple CEO Steve Jobs sent the design team back to the drawing board because of flaws in the product’s design. James Dyson created more than 5,000 failed prototypes of his wildly successful vacuum cleaner. And so on. ...

Read the rest at Scott's Harvard Management blog, Innovation Insights

If you work in a large company and you want to become humble quickly, check out Stall Points, a fascinating stream of research by the Corporate Executive Board that was recently a cover story for the Harvard Business Review. The research shows that almost all companies hit a point where historical growth rates decelerate. Once the corporate growth engine stalls, it is very hard to restart.

The study involved close to 500 companies that have appeared on the Fortune 100 or international equivalents over the past 50 years. Close to 90 percent of those companies experienced a stall, or “secular reversals in company growth fortunes.” Only 50 percent of companies that stalled were able to grow even moderately over the next decade.

There are many reasons why growth becomes increasingly difficult as a company grows. One challenge is that the hurdle for new initiatives becomes so high that many potential game-changing initiatives never see the light of day.

A few weeks ago I was with a group of senior executives at a Fortune 100 company. We were talking about the strategic objectives of that company’s innovation efforts. One executive said that $1 billion felt like a reasonable target for a generic new growth initiative. Another said, “A billion is nice, but at our size we really need to set the target at $10 billion.”

Mathematically, of course, the executive is right. It got me thinking, though. Only 261 public U.S. companies had $10 billion in revenues last year. How many of the high-flying start-up companies over the last decade reached $10 billion in revenue in 10 years? Well, Google hit $10 billion in its eighth year (2006) and … I think that’s it.  …

Read the rest at Scott's Harvard Management blog, Innovation Insights

"What’s best practice?” Just about any manager seeking to improve corporate performance has fielded this question from leadership. The theory is that the manager should find a successful company, find out what practices have made them successful, mimic those practices, and expect success.

However, blindly worshiping at the altar of best practices is dangerous. The problem is that practices that work incredibly well in one circumstance can be ill-suited for another circumstance. Even if your company has successfully overcome a problem in the past, it is always worth asking if the circumstances have changed in a way that means your approach needs to change as well.

Read the rest at Scott's Harvard Management blog, Innovation Insights.

I thought I’d write a short post providing some immediate reflections from an interesting panel discussion I facilitated today.

The panel, titled “Innovation: Change Happens,” featured Dow Corning Chairman, CEO and President Stephanie Burns, Eastman Kodak President and COO Phil Faraci, and Procter & Gamble Chairman and CEO A.G. Lafley. It was part of the Newspaper Association of America and American Society of News Editors “Capital Conference 2008.”

Each of the panelists provided a short account of their respective company’s change efforts and answered audience questions. The six key points that seemed to be in common across the three companies were:

• The need for a crisis or some kind of “burning platform” to motivate transformational change
• A clear vision and strategy … that allows room for iteration
• A recognition that transformation is a multi-year journey
• A need to put the customer or consumer in the center of the transformation equation
• The critical importance of demonstrating to skeptics that different actions can lead to different results
• The need to over-communicate to employees, customers, stakeholders, and shareholders

Read the rest at Scott's Harvard Management blog, Innovation Insights